I know there are so many jokes about SEPA that it's hard to come up with a new one but, with the title of this blog, I had to try. Others include je ne SEPA for the French and the euro for the Greeks. But the march towards harmonisation is continuing at pace, with the SEPA deadlines for corporates about to hit in just over two months.
In order to see what's going on, friend of the Club Edith Rigler has written a timely piece about the whole challenge of the end-dates. Well worth a read:
Do you SEPA? Simply European, or perhaps American as well?
In less than three months a significant change will take place in the European payments landscape.
The "end-date" of migration to the so-called Single Euro Payments Area (SEPA) is looming. From February 1, 2014 mandatory standards for low-value euro payments will kick in. Payments which for decades have been made according to national regulations, and have thus differed from country to country, will now be harmonised and follow uniform rules and standards across 33 countries in Europe. The objective is to create a truly internal market for payments.
While it is correct that European banks will be most directly affected as the euro is legal tender in the 18 euro zone countries and a further 15 European countries make and receive euro payments, U.S. banks with a presence in Europe will also be affected.
The end-date has been known about for some time now, ever since it was set by the SEPA Regulation . When the Regulation was adopted in 2012, SEPA was nothing new. On the contrary, European banks had been involved, albeit some more than others, for years. Some started to set up SEPA projects as early as 2005, and banks' efforts intensified after 2009, when the Payment Services Directive (PSD), the legal basis for SEPA, was transposed into national law in all EU member states.
Much scepticism has been voiced about SEPA. Was it necessary to harmonise something as mundane as payments in the first place? Surely each European market already had an efficient payment system anyway? Would SEPA bring benefits? Did SEPA not just cause revenue losses for banks? What was the business case for firms? Could consumers be reasonably expected to remember the new 22-digit International Bank Account Number, quickly labelled "IBAN the Terrible"? In short, enthusiasm for SEPA has withered and waned over the last few years. SEPA fatigue and SEPA scepticism were everywhere.
Above all, SEPA was often seen as a purely European headache; European banks would worry about it and make it happen, but other regions would not be affected.
That, of course, is not true at all. While it is correct that European banks will be most directly affected as the euro is legal tender in the 18 euro zone countries and a further 15 European countries make and receive euro payments, U.S. banks with a presence in Europe will also be affected. In fact, most large U.S. banks have been members of the EBA CLEARING euro payment system for years and have therefore been aware of developments in Europe.
Some focused on financial institutions, however, providing correspondent banking services, where euro payments pass through the high-value clearing system TARGET2, which is currently not part of the SEPA Regulation. Those U.S. banks with corporate clients which make low-value payments to pay for salaries of local European staff or pay vendors for goods and services quickly understood that they too needed to become SEPA-compliant.
In fact, having analysed their client bases and the European market place, U.S. banks quickly understood that SEPA offered a great opportunity for them to deepen their relationships with their clients. In the past, U.S. firms wishing to operate in Europe tended to turn to domestic European banks to make local payments, or to refrain from making mass payments in Europe at all. European banks were seen as having the local expertise and ability to handle the many different local formats which U.S. banks presumably lacked, plus cross-border payments also posed other difficulties: they were costly, slow, inefficient, the pricing was not transparent and lifting fees were unregulated.
With SEPA, the distinction between domestic and cross-border vanished, including pricing and execution time. It was no longer necessary to have a euro account in each country in which a corporate operated. It is not surprising, then, that U.S. businesses became increasingly interested in SEPA and asked their U.S. banks whether they could participate in this new world of European payments.
It did not take long for U.S. banks to set up SEPA projects and, like their European counterparts, work towards SEPA-compliance. Proactive communication with their clients became imperative, and this is where there is probably the biggest differentiator: for European banks, communicating SEPA changes was not always easy, and was often painful. After all, payments in Europe already worked efficiently, at least in the domestic markets. Formats were known, and rules had been established a long time ago, so that firms in Europe were not interested in changing their processes and procedures. Moreover, before the SEPA Regulation was adopted in 2012, there was no mandatory reason for corporate to comply with banks' efforts.
By contrast, for American banks SEPA represented an opportunity to change the bank-to-client relationship: bank staff could now talk to their clients about the euro, about European markets, about making payments more efficient and less costly, about the bank's commitment to Europe. Discussions shifted from the U.S. dollar to the euro. American banks were able to demonstrate that they, too, had European expertise and could serve their clients wherever they wanted to operate in Europe, just as easily as the European banks could.
One of the especially difficult components of migrating to SEPA is the new direct debit process, which is fraught with many new rules and standards. Consequently, European banks have found it challenging to introduce this payment instrument. By contrast, some U.S. banks found themselves in an easier position. If their clients used only credit transfers, migrating to the new SEPA Credit Transfers was relatively easy, whereas implementing the SEPA Direct Debit is a complicated procedure. Clarity about strategy has become very important. Some U.S. banks decided to be disciplined about their strategy and continue only to service their existing client base. They have pushed potential expansion strategies with additional services into the future, once the SEPA dust has settled in 2014.
On the other hand, some U.S. banks which had officially declared a new European expansion strategy of pursuing European firms and non-bank FIs discovered to their peril that SEPA direct debit was a must for doing business. Simply stated: if the target client base requires direct debit, SEPA Direct Debit must be developed, otherwise the bank would not be able to take part in the SEPA market.
In general, migration to SEPA has been slow, and has failed to meet regulators' expectations. In fact, regulators keep stressing that there is only a plan A, and that plan B does not exist. In other words, the deadline of February 1, 2014 will not be moved, and a grace period to enable laggards to complete their migration is not in the cards. With some exceptions, U.S. banks say that they have been SEPA-ready for a while and can now enjoy the luxury of sitting back and watching the rest of the European market struggle.
As the SEPA end-date approaches, therefore, clients are increasingly likely to ask their bank "Do you SEPA?". For those banks that cannot answer "Yes, I do", the SEPA end-date may mean the end of their ability to compete in the euro mass payments market.
Edith Rigler is an independent payments expert who advises banks, payment systems and payment institutions. She has published extensively on payments issues and held senior positions at a number of global banks. The views expressed are her own.